MGPI - NASDAQ

Good day, and welcome to the MGP Ingredients fourth quarter of 2024 financial results conference call. All participants will be in a listen-only mode for the duration of the call. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. And to withdraw a question, please press star then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Amit Sharma, Vice President of Investor Relations. Please go ahead. Thank you. Good morning, and welcome to MGP's fourth quarter earnings conference call. I'm Amit Sharma, vice president of investor relations, and joining me is

Brendan Gall, interim president and chief executive officer. And chief financial officer. And Mark Davidson VP corporate controller and head of treasury. We will begin the call with management's prepared remarks before opening the call to analyst questions. Before we begin, this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward statements made today due to a number of factors, including the risk factors described in the company's annual report filed with the SEC. Company assumes no obligation to update any forward-looking statements made during the call except as required by law. Additionally, this call will contain references to certain non-GAAP measures which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures is included in today's earnings release issued this morning before the market open.

If anyone does not already have a copy of the earnings release, you can access it on our website. mgpingredients.com. With that, I would like to turn the call over to Brendan Gall. Brandon? Thank you, Amit.

Good morning, everyone. Before diving into our results and outlook for 2025, I want to take a moment to recognize our incredible team across the organization. As they continue to act with speed, agility, and dedication in a difficult and volatile operating environment, their actions ensured that our fourth quarter results were in line with our expectations and our full year 2024 results were within our updated guidance. We've made meaningful strides across two of our three operating segments. However, this progress was more than offset by the faster than expected and larger than expected decline in our brown goods business primarily due to elevated industry-wide barrel whiskey inventories. As we look ahead, we are committed to maintaining our position as one of the leading suppliers of high-quality differentiated premium American whiskey. Elevated inventories in high, albeit slowing industry whiskey production will remain a headwind for our Brown Goods business. We are taking decisive actions that are designed to navigate the current industry landscape and put us in a stronger competitive position. On the other hand, we are pleased with the trajectories of our branded spirits and ingredient solutions businesses. These two businesses on a combined basis accounted for a and we believe we are well positioned to deliver attractive growth and make them an even bigger driver of our consolidated financial performance in 2025 and beyond. As for the fourth quarter of 2024, results were in line with expectations. Consolidated sales for the fourth quarter decreased 16% in the prior year period. Factoring in the Atchison Distillery closure, consolidated sales decreased by 7% as the expected declines in the distilling solutions and branded spirits sales more than offset a return to growth in the ingredient solutions segment. Adjusted EBITDA decreased by 9% to $53.1 million as lower SG and A expenses partially offset reduced gross profits. Basic earnings per common share declined to a loss of $1.91 per share due to a one-time noncash adjustment to goodwill. Adjusted basic earnings per share decreased 4% to $1.57 per share. Before Mark and I discuss the results and our 2025 guidance, in detail. Let me take the next few minutes to highlight the current operating environment in each of our three business segments. This business continues to perform well. It remains a cornerstone of our long-term strategy to establish MGP as a premier branded spirits company. Across the global alcoholic beverage segment, North America is one of the most attractive markets, and American whiskey and tequila are the most attractive categories. We are well represented across both these sectors. Strongly positioning us for the long term. As we look ahead, many of our premium plus brands continue to gain traction in the marketplace. This is highlighted by the continued momentum of Penelope, and Elmayor, two of our largest premium plus brands, whose sales were up strong double digits in 2024. The strong sales trend for Revel one hundred is another example of the upside potential of our Premium Plus portfolio. Revel one hundred's strong sales performance is benefiting from our realignment of the Rebel brand with the lifestyles of its targeted consumer cohort and more impactful marketing. Highlighted by our sponsorship of Kyle Butch's number eight car under Richard Childress Racing for the NASCAR season. We see potential to employ similar playbook with other brands in our portfolio. At the same time, our extensive portfolio brands across the price positions us well to opportunistically meet consumers where they are. Particularly in the current environment. We are pleased with the double-digit average annual growth of our Premium Plus portfolio over the last two years. Notwithstanding some near-term volatility, we believe that it remains well positioned to grow ahead of the category over the long term. Turning to our Ingredion Solutions segment. Sequentially improving sales and gross margin performance in the fourth quarter reinforced our confidence in this business's attractive long-term growth and gross margin upside potential. Food with better functional nutrition such as high protein and high fiber continues to meaningful outgrow overall food industry spending. Our specialty starches under the FibroScan brand and specialty protein products under the Arise brand are designed to meet these needs. Our innovation pipeline remains strong. With opportunities to expand into higher growth and markets. Including plant-based foods and healthy snack categories. We continue to receive strong interest from both existing and new customers and we are committed to working closely with them develop ingredient solutions that align with emerging consumer trends. We're positioning this business to take full advantage of these tailwinds by sharpening our commercial and operational execution. The recent promotion of Mike Butchaw to the Ingredion Solutions segment president role should enable even closer cross-functional collaboration within the team. In addition, the completion of the beef starch fuel plant should provide cost relief related to the disposal of the waste start stream in the second half of 2025 We believe these initiatives will help to unlock additional growth potential of this business and further solidify our position as a leading specialty wheat ingredient supplier. Now let me provide an update on our distilling solutions business. As we called out on our third quarter earnings call, Soft whiskey consumption in elevated industry-wide barrel whiskey inventories are having a larger and quicker than expected impact on our BrownGoods results. And this pattern is continuing. Annual whiskey production in the US has increased by nearly a million barrels since 2020, to nearly 4.6 million barrels. As the number of new and existing distillers have added or expanded distilling capacities to fulfill stronger demand from not just multinational and craft whiskey brands, but also private investment funds. However, with consumption normalizing from post-COVID levels, most of these demand projections turned out to be too optimistic. And left brands with too much aging inventory relative to their current sales. This issue was initially more pronounced among our smaller craft brand customers, but we are now seeing similar issues from many of our other customers as well. As a result, to better align their inventories with current demand, they are cutting back their orders for both new fill and aged whiskey. These developments are putting even more pressure on distilling solutions sales and gross profit in 2025 than we previously anticipated. And we believe this dynamic will persist into 2026. The good news is that our customers remain committed to the American whiskey category. And the brown goods industry appears to be responding to this excess inventory. Industry data published by the TTB shows that after double-digit increases over the last three years, total US whiskey production through October is down 1% in 2024, including a 4% decline in the last six months. Compared to the same periods in 2023. At the same time, TTB industry usage trends are improving as total whiskey barrel dumps are down 1% in the last six months. Relative to a 4% decline year to date through October and a 10% decline in 2023. We are encouraged by this nascent improvement in the industry supply-demand dynamics. Even though total whiskey remain elevated relative to historical levels. That said, we're not simply waiting for market conditions to improve. We're taking decisive proactive actions designed to derisk our Browngoods outlook and emerge in a stronger competitive position from this period. As we mentioned on our last earnings call, we're optimizing our distillery cost structure to mitigate the impact of lower production volumes. Now as we plan additional production cuts in 2025 and 2026, have identified additional cost savings opportunities and are leaning more on our key suppliers and partners to further lower our overall cost structure. At the same time, we are strengthening our key customer relationships. We have a strong reputation. And a long track record. Of providing high-quality aged and new distillate to many of the largest American whiskey brands. Our ability to produce unique and complex mash bills at scale is unmatched in the industry. We are leveraging these strengths to plan more strategic partnerships with our top customers. Let me reiterate that we remain committed to our Brown Goods business. We're confident that our actions will help us navigate this challenging period over time. and position us to capture the full value of our aging whiskey inventory. Putting it all together, our 2025 guidance signals that these ongoing challenges in the distilling solutions business will continue to overshadow meaningful strides in our branded spirits and ingredient solutions businesses. Specifically, for 2025, we expect net sales in the $520 million to $540 million range. Adjusted EBITDA in the $105 million to $115 million range, In adjusted basic earnings per share in the $2.45, to $2.75 range. With average shares outstanding of approximately 21.3 million shares, and full year tax rate of approximately 25%. Due to the factors in our proactive actions I mentioned earlier, the full year guidance now assumes approximately 50% to decline in Distilling Solutions segment sales and a 65% decline in segment gross profit relative to our previous estimate of 35% and 50% declines respectively. Full year branded spirits segment sales are expected to be relatively flat with gross margin in the high 40s in line with 2024. As we cut back on some of our single barrel programs, as consumers and retailers become a bit more selective, and as we sharpen our price points on some brands. We expect Ingredion Solutions to return to positive sales growth in 2025 along with improving gross margins. We've accelerated our productivity initiatives to reduce costs across the business in this challenging environment. Including a double-digit percentage reduction in our corporate headcount implemented earlier this month. We believe these initiatives will help offset the reinstated incentive compensation accrual this year and will remain a tailwind for the company beyond 2025. We're committed to investing behind our brands. At the same time, we're reducing and realigning our advertising and promotion spend to our most attractive growth opportunities. As a result, Branded Spirits A and P spend as a percent of Branded sales will be approximately 12% in 2025. That said, with most of our A and P spending behind our premium plus portfolio, branded spirits A and P as a percent of our Premium Plus sales will remain high at approximately 25%. Well ahead of industry spending levels, As we look at the quarterly cadence, first quarter tends to be our smallest gross profit and EBITDA quarter. Due to the seasonality of our business, We expect this dynamic to be even more pronounced in 2025 due to weather-related disruptions in the timing of onboarding new customers in our ingredient solutions business. We remain committed to generating strong cash flows As part of this commitment, 2025 CapEx is to be approximately $36 million down from approximately $73 million 2024. A net whiskey put away is expected to be in the $15 million to $20 million range. Down from approximately $33 million and $51 million in 2024 and 2023, respectively. Our 2025 Whiskey Putaway is primarily for our own brands. Given the evolving situation regarding the implementation and timing of tariffs, their potential financial impacts are not included in our current outlook. The vast majority of any impact would be from our tequila brands. That are imported from Mexico as well as other imported products. We have contingency plans in place to focus on what we can control help mitigate the potential impact of any tariffs. With that, let me hand it over to Mark for the review of our fourth quarter results. Thank you, Brandon. For the fourth quarter of 2024, consolidated sales decreased 16% to $180.8 million compared to the year-ago period. Excluding the impact of the Atchison distillery, Consolidated sales decreased by 7% Within the Silling Solutions segment, reported sales declined by 25%. Excluding the impact of the Atchison Distillery, segment sales declined by 6% as a 10% decline in Browngood Sales. Is partially offset by a 15% increase in warehouse service sales. Branded Spirits segment sales decreased by 12% due to the continued double-digit decline in our and value price brands, as well as a 12% decline in our premium plus sales as we lapped strong growth in the year-ago period. Ingredient solution sales increased by 4%. As expected, specialty protein sales posted its first quarterly growth of the as new business wins offset the stronger U. S. Dollars impact in our international sales. While we are proud of the progress we've made in generating specialty protein demand in North America, We expect order patterns to be relatively choppy in the early quarters of 2025, as we work to onboard new specialty protein customers. Our specialty starch sales increased 8% leading to a record year in 2024. As FibroScan continues to benefit from long-term consumer-driven tailwinds. Consolidated gross profit decreased 13%. Excluding the impact of the Acheson Distillery, consolidated gross profit declined by 15% to $74.5 million due to lower gross profit, across all three operating Gross margin declined by 400 basis points to 41.2% Fourth quarter SG and A due to the lower incentive compensation expense. While advertising and promotion expenses declined 15%, largely due to the timing of certain A and P campaigns within the year. Full year 2024 A and P spending increased by 6% compared to full year 2023. Fourth quarter adjusted EBITDA decreased 9% to $53.1 million as lower gross profits more than offset reduced SG and A and advertising and promotion costs. During the fourth quarter, we recorded a $73.8 million non-cash adjustment to the carrying value of goodwill the branded spirits segment, primarily due to certain unfavorable macroeconomic factors such as a high discount rate and lower peer valuation multiples, since the 2021 Lexco acquisition. This non-cash charge is excluded from our adjusted metrics as outlined in our earnings release. The impairment is not a reflection of the performance of the Luxco or Penelope acquisitions. As each have performed well since their respective close dates. Net income for the fourth quarter decreased to a loss of $42 million due to the previously mentioned one-time non-cash adjustment. Net income decreased 6% to $34.4 million. Basic earnings per common share decreased to a loss of $1.91. While adjusted basic EPS decreased 4% to $1.57. We continue to prioritize strong cash generation by managing our working capital and reducing our barrel inventory put away. Net whiskey put away declined from $51.1 million in 2023 to $32.9 million in 2024. Helping to drive a 22% increase in full-year cash flow from operations. $102.3 million a record year for the company. Capital expenditures were $29.7 million during the fourth quarter and $73.2 million for the full year. 2024 capital expenditures likely represented a high watermark for our capital spending as we expect it to decline to $36 million 2025. Our balance sheet remains healthy and we remain well capitalized. With debt totaling $323.5 million as of the end of 2024. Leaving us with approximately $520 million in availability under our debt facilities. We ended the year with a cash position of $25.3 million and our net debt leverage ratio remained largely stable at approximately 1.5 times at the end of 2024. With that, let me hand it over to Brandon. Despite our lower year-over-year financial projections, in the uncertainty we face as an industry at this point in the cycle, we remain confident We continue to be profitable and we believe our balance sheet, cash flow generation, and access to capital gives us a strong foundation. We remain a leader in the contract distillation of American Whiskey, and we are committed to this business and our customers. We are also a leading supplier of specialty wheat ingredients, In both cases, we believe we will emerge stronger and more competitive in the years to come. What gives us even more confidence is the progress we are making for our mission of becoming a premier brain and spirits company. Over the last four years, our branded spirits initiative has evolved from an aspirational idea to what we believe will be our largest segment by sales and gross profit in 2025. Our diverse portfolio of brands spans categories and price points, giving us the ability to meet consumers where they are. Our portfolio premium plus price brands has performed well. Growing to 46% of total segment sales. And expanding gross margin by 1500 basis points since 2021. Our national sales and marketing platform combined with the scale of our portfolio allows us to be a critical partner with. We believe this is yet another example where our commitment and leadership position us well emerge stronger and more competitive in the years ahead. But what really gives me the most confidence is our people. Every day, I'm humbled and honored to work side by side with my colleagues at MGP. Our team is passionate, innovative, agile, and resilient. There's no other group of individuals more committed and capable than those on our team. In conclusion, We remain well positioned in all three of the industries in which we compete. And our unique capabilities and product offerings give us the right to win. The current environment in the spirits industry is challenging. However, we believe our strategy and most importantly, our people will steer us into greater success. That concludes our prepared remarks. Operator, we are ready to begin the question and answer portion of the call.

We will now begin the question and answer session. And to withdraw a question, you may press star then two. Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning, Joe. Alright. Building. Do you use I mean, talk a little bit more about your strategy for aged going forward. And when I say that, it's not just you know, for It seems like you've kind of shut down the the spot market with makes makes sense. But even for know, customers where you're making age that they're gonna buy down the road, I mean, last quarter or the end of last year, you were kinda left high and dry by some customers that had committed to that inventory and then walked away from it. Are you putting anything in place Are you calling the customer base of who you're gonna do that for? I mean, trying to understand how you're derisking that business a little bit more.

Yeah. Thanks. Thanks, Bill, for the question. Yep. This is Brandon. So, yes, you're exactly right on a lot of those points. You know, last year in 2024, we said at the beginning of the year, age sales were gonna be down year over year. New digital sales were off last year mid single digits. So, you know, on the age front, it did play out largely how we anticipated. We expect this year to be down even more. Just due to where we are at this point in the cycle for that business. However, that being said, we are not giving up on the age business. Although we are at the point in the cycle where maybe it's in relatively less demand we do not believe this will always be the case. We are still the only contract distiller partner to offer customers new distillate and aged at the breadth and scale that we do. This is important to our existing customers as it helps them fill gaps in new customers as it speeds up their brand timelines. As increases foe as our increase focuses internationally, age will play an even more critical role in our success. So we believe our long track record, Bill, our reputation for quality and our commitment to our Brown Goods business and customers will allow us to monetize value of our aged over time. Just to the point we're at in the cycle, it's not playing as prominent as other role as it has in the past. Yeah. And and, Bill, the second part of your question is is is a really good one, which is what's transpired with our customers, you know, since the other q three call? So since last quarter, customers that just recently confirmed their contracts reached out to us to cancel their 2025 orders, while others began calling us for reduced pricing. At the same time, spot pricing too for both Nudislad and age continued its decline below the reduced levels that we'd anticipated back in October. So in response, we've done Two things. Two critical action steps. Number one, we made the strategic decision to begin outreach to our other contracted customers in attempt to proactively While these conversations are still taking place, we assume this proactive partnership approach will result in additional reductions in sales and gross profit. Simultaneously, we've also set in motion cost savings initiatives to offset some of these impacts. However, even with these measures, we expect Distilling Solutions sales and gross profit to be down now fifty percent and sixty five percent respectively this year. So to sum it up, Bill, we are really leading in to our relationships with our critical customers. Rather than waiting for our phone to ring, to see what customers are gonna say, we're using the value of the relationship and the long standing interactions we've had with them to proactively contact them and and and ask them, what their real needs are and where and and compare that to where the market prices are today. Because we want you know, it's very critical for us as we remain committed to this business to expand that partnership and to work with them through these tough times.

Got it. So just to to translate it, From November, there's not much change to what your outlook was for aged in 2025, but the real difference is now you have a, I guess, a firmer after going to at least through a third of the customers and not half with new pricing and new volume. You've come up with kind of a new estimate of what new business will be in 2025. Is that is that right way to think about it?

Yeah. That is right. Our our outlook on age for 2025 volume volumetrically is largely what it was back in October, which was pretty small, especially related, you know, prior years. You know, if anything's changed, we're probably gonna get a little sharper on price there. Where we can. But, yeah, the aged outlook hasn't changed. You know, we we feel really good about our inventory position. We feel very confident that we're gonna be able to monetize that over time.

Okay. And then second, just on the branded portfolio, it's offer for us to understand the the true growth, excluding, like, what you're planning to call is there any way to to as you rationalize that portfolio, understand kind of what the drag will be in twenty five for for brands you're you're exiting or deemphasizing versus just kind of the core growth.

Yeah. So in the premium plus bill, we're expecting flattish sales for the year. And, you know, that you know, the overall brand spirits market is still trying to find its footing and stabilization So, you know, we feel that, you know, flattish growth especially at some of those price points, is prudent. Although, obviously, we're gonna aim for higher. But we're trying to be realistic with our numbers for 2025. And the reason for that really is twofold. Number one, what we've taken out of the 2025 number that we had previously had a lot of success with are the single barrel offerings. To retailers. These are high margin, high priced, really good products and really good offerings that, you know, were very, very popular when they first came out a few years ago. They're popular because they were very scarce and they were very premium and they were very original to what that retailer could offer offer differentiated that retailer. But what's happened is a lot of other suppliers have gotten smart to it as well. And so the scarcity has gone away in the high price nature is is a little less consumable because of that from a consumer standpoint. So the demand has gone down on those. So we are taking that we are taking that number down in our 2025 for a premium plus Portfolio. We're also incorporating we're also incorporating more price support at certain price tiers to either strategically position certain products first their competitive set or to help move maybe some higher price slower moving inventory to help clear So that's premium plus. And, mid and value is collectively is gonna be down, you know, mid to high single digits. Which sequentially is a really good improvement from 2024. And the reason for that is we are now no longer going to be lapping the repositioning of rebel eighty. Which is a mid price American whiskey that we, you know, discontinued in 2024. So that's now gonna be out of the comparison periods and we expect the mid and value portfolio perform relatively better sequentially. Great. Thanks, Richela.

Thank you, Bill.

And our next question will come from Robert Moskow with TD Please go ahead.

This is Seamus Cassidy on for Rob Moskow and thanks for the question. So, Brian, you cited the TTP data and looking at that data, it seems like there's something, like, over a decade of current consumption sitting in barrels. You said that you and other industry participants are cutting production to address the supply-demand imbalance. But my question is looking at maybe 2026 and beyond, how confident are you that Distilling Solutions return to growth or said differently, how long do you think it will take for these production cuts to start actually sort of addressing the supply-demand imbalance that you're seeing in the market right now?

Yeah. Great question. So we see this tough environment persist And it really depends on on the industry how much more beyond that it's going to last. However, we do expect over time industry players behave more rationally. And like we shared, we're starting to see some signs of that. Which is encouraging. What we do know, Seamus, is that we're doing our part We are reducing our production. This will We are controlling our controllables such as reducing costs, running with greater efficiency, and staying close to our and like I've I I said with Bill, we still believe that our age will remain valuable. And although we remain committed to this business, it's worth noting that it's gonna be a much smaller part of our overall business in the coming quarters and years than it's been in the past.

Got it. That's helpful. And then maybe one more from me. There's an s three out this morning with, Chairman Don Luck's listing his shares for sale. Given his significant ownership stake, is there any appetite by the company to maybe step in and repurchase some of these shares? Especially in the context of the increased share repurchase activity in four q.

Yeah. Great great question. So, yeah, the yes three that went out this morning is more of a housekeeping item. When we when we did the LuxCo acquisition, it actually part of the agreement that we would do, you know, a number of those on behalf of Don and his family. I believe this is the second one that we've done. So this is exactly that We wanted we we wanted to we we wanted to do it in the back half of last year, but there was some information that the board was aware of that prevented us from doing it, so that's why we filed it today.

Understood. Thank you. Hi, Shamus.

And our next question will come from Torrent with Wells Fargo. Please go ahead.

Hey, good morning and thank you for the questions. I guess first on the guidance, particularly entering a year you would provide an idea of your visibility ahead. Do you guys typically cite, you know, amount of distilling plan already contracted for the year. So maybe, I guess, entering this year, new environment, help us get some comfort around the outlook. Could you maybe provide some context around the buildup of the guide particularly for distilling, and also any cadence considerations perhaps by segment for the year. Thanks.

Yeah. Thanks, Mark. Yeah. So Yeah. A a large percentage, in fact, the vast majority again of our projections for this year are contracted. You know, given the fact that we're in this anticipating even less on spot and age, you know, even more of our expected sales are under commitment through new know, I I've already shared what what's transpired. And in our and what we're doing in response. So we increased the year-over-year decline in that business to fifty percent sales and sixty-five percent gross profit. That gross profit impact is approximately twenty-one million dollars incrementally to what we had shared a few months ago. And that's netting out a lot of the really, really great cost savings initiatives the teams identified and isn't and is putting in place. So that number otherwise would have been much bigger. So, you know, from a confidence standpoint, we feel we're doing all the right things. We are getting out in front of it. We are anticipating rather rather than hoping that our contracts hold, we are now building into our guide for the first time that the contracts are gonna be possibly written renegotiated closer to what our customers need. And closer to the market price for those products. So that is a first for us. That is us being proactive and that is us really trying to partner with our customers and show our commitment to them into this business. Cadence is no. Yeah. As far yeah. As far as Cadence, go ahead, Mark.

Yeah. Yeah. So as far as quarterly cadence, we mentioned in our prepared remarks that seasonality would be an issue and we'd have some softness in the first quarter. Specifically as it relates to our ingredient solutions segment. Due to some unexpected shutdowns and plant-related issues we've already experienced. And some choppiness as it relates to the specialty protein sales relating to new domestic business that we that we spoke to contributing to our Q4 growth in specialty protein. So with that ingredients soft Q1, what we're going to see is a softer relative Q1 to the rest of the year. And to give you an idea of that q one of twenty-four, we had approximately twenty-two percent of our gross profit in in the first quarter of twenty-four. It'll be even more pronounced than that, a lower respective gross profit is expected in the first quarter of 2025.

Okay. Thank you for that color. And then how are you thinking through cash flow project progression for the year? Earnings are under pressure. You've rebased CapEx. Even with, I think, some carryover projects. And then there's, lightweight potential for the canal PR out. So just any additional color on how you're thinking about cash needs for here in management throughout. Thanks.

Yeah. Yeah. I think I'll start on that one. Yeah. Great question. So, yeah, last year, as Mark shared, cash flow from operations was a record for our company, over a hundred million dollars for the year. And this year, despite your point, Mark, the pressure on earnings and the lower EBITDA outlook, We still expect this to be a very strong free cash flow year for the business. And the reason for that is, just as you said, we are reducing our CapEx significantly. We believe last year was a high watermark for the business. And this year, we think it's gonna be, you know, approximately thirty-six million dollars somewhere in that range. But still, we are, you know, we are not walking away from very positive ROI projects that are gonna help us strategically position ourselves in the future. So that's gonna be one huge source of cash that wasn't there in the past. And then additionally, our put away is also going to be reduced on a net basis this year. So we're forecasting probably fifteen million dollars to twenty million dollars in net put away. Last year, it was, you know, roughly thirty-two, thirty-three million. In the year before that, it was closer to fifty-one million dollars So just through those actions alone, you know, we're real we're able to free up a lot of cash and and use that at our disposal, whether to pay down debt or do other things opportunistically out in the market. That being said, you know, you know, our net leverage ratio at the end of the year was approximately one and a half. We we do expect that with the lower earnings, the the to be you know, to be pushed upward possibly, but we don't see it going above two times before the end of the year. Oh, and one other thing, Mark, for the Pinal T earn out, that's not slated to be paid out until Q1 of 2026.

Okay. Great. Very helpful.

Thank you, Margaret.

And our next question will come from Sean McGowan with Roth. Please go ahead.

Thank you. Two questions. One, how yeah. Can you hear me? Okay. Yeah. How confident are you on the know, given those those changes in inventory and what's going on in the industry? How confident are you of the carrying value of the distiller that you have on your books?

Yeah. We're we're we're confident, Sean. Our carrying value is it remains far below where market prices are. And, you know, you can imagine this that our size and scale you know, that, you know, our our costs can be relatively, you know, low within the industry. And so, there there's no cost for concern at this point in time there.

Okay. My other question was, you know, you talked about the vast majority of the tariff exposure being on tequila. But can you talk a little bit about you know, the Europe I mean, yeah, the European tariffs kinda getting re resuming at the end of next month and what, you know, what portion of your output is eventually, you know, the part of your customers bound for Europe and and what kind of exposure does that represent?

Yeah. Today, it represents very little exposure is the answer. But that's but we don't view that necessarily as case longer term. So, yeah, the where the tariffs are is they are set to resume, you know, later on this year. And resume at an even higher rate than they were before in Europe, at around fifty percent. So those conversations are fluid. We we have, more than one industry trade associations that are really working on behalf of the industry. To try to, you know, do what they can to mitigate or prevent those tariffs from coming back on. But but yeah as far as our our guidance goes for 2025 Sean not a big number is is incorporated into that. For for international sales.

Okay. Thank you.

Thank you, Sean.

And our next question will come from Ben Kleevee with Lake Street Capital Markets.

Thanks for taking my questions. First question on the ingredient business. Wondering if you can elaborate a bit on the magnitude of the 1x cost in that segment in twenty-four and and expected continued expenses on a 1x basis in the first half of 2025 as you know, kinda transition that that segment post Atchison?

Yeah. You know, Thanks. This is this is Mark. So, you know, for the for the full year 2024, our ingredients gross profit was down twenty point eight million dollars so as versus the prior year. So, you know, the first item there, six point five million of that had to do with the b start credit. And that's excluded from our pro forma adjust metrics for the segment, which we provide in our earnings release schedules. Aside from the b surge credit, we had about around eight million dollars in other operational costs and headwinds, including incremental costs to dispose of the B. Sarge slurry byproduct. Which is something that we are mitigating with our biofuel facility. In the second half of 2025. And then lastly, approximately two point five million dollars of cost to operate the Proterra facility that, you know, did did not exist in 2023. So those are really the one-time costs The remainder of the decrease in gross profit related to sales decreases, particularly in in specialty protein.

Yeah. So just to build on that, yes, the specialty protein business, that was the business that took a hit last year due to the strong FX headwinds of the strong US dollar. A lot of our arise five hundred business goes to Japan. So after losing a big slug of that business last year, the teams that are really, really nice job of finding domestic customers for that, in the time since. We saw that come on in Q4, which if you look at our specialty protein product line, it was the first quarter of growth of the year. For that product line and although it's gonna be choppy as these new customers are onboarded in 2025, we do expect we do expect there to be more demand for that product which is great news. Secondly, Mark mentioned Proterra. We are very excited for this new capability. Just as a reminder, this commenced in Q2 and went online. And we're making more and more progress. So it's still going to be a slight drag to the ingredient solutions business P and L in twenty-five, but much less than it was last year. Just a couple updates there. We have two new accounts expected to come online in the second half that are very, very large accounts for that business. And we also have three new ingredient inclusions that are expected to be released and ready for sale in Q3 and Q4. So again, very excited for that business. This has been a very, very challenging year operationally, Separating it from the distillery came with a ton of complexity. And that's what's resulted in a lot of these one-time costs. But I'm very, very proud of the team for how they've responded. I'm also very, very excited to have shared the news earlier in the year about the promotion of Mike Butchart president of Ingredion Solutions. His ability to work collaboratively now with not only the commercial team, but across functions, it is just gonna be incredibly accretive to to that business over time.

Got it. No. That that all makes sense. A lot of moving pieces and, yeah, certainly a lot of a lot of progress there of late. I guess one follow-up question on the segment is then around the international business that that that you referred to, Brandon. Is your expectation that those international customers are Or just kind of lost. You know, have they have they gone to, you know, another you know, another ingredient within, you know, within their recipes or are they expected to come back on here, maybe as their inventory levels come down or as you know, forex, pressures mitigate.

Yeah. Great question. So as a reminder, our Arise product line in specialty protein, just like our five our Fibers and product line in specialty starch are very proprietary to us. We are leaders in in those two areas. And in terms of specialty wheat ingredients. And so, yes. So the Japanese business as an example did go away quite a bit in 2024. And also in 2025. But, you know, their substitutes for what we do are hard to come by. And so we are seeing as the as the US dollar has weakened a little bit, over the last, say, number of months relative to the Japanese yen, we are seeing that interest come back. So it was definitely I cannot which is why we're seeing them, you know, show more interest again even still at higher or elevated levels of exchange rate.

Very good. I appreciate you guys taking my questions. Thanks a lot. I'll get back in queue.

Thank you, Ben.

Again, Our next question will come from Mitch Panhiro with Stifel. Please go ahead.

Yeah. Hi. Good morning. Hi. So As far as, you know, looking at your put away for 2025, you're gonna have some put away, but I'm curious. I guess that's all for your branded spirits business? There'd be no need to really put away for You know, wholesale customers, is that is that right?

Yeah. That that's our that's our thinking right now. It's primarily gonna be for our own brands. But, you know, as we watch the dynamics in the industry, you know, that's a I but similar to last year, we expect this year's net put away to be down year over year and most of that is getting good at brands.

Okay. And then You know, is there a fungibility of the mesh bills? From a product that was earmarked for wholesale customers Can any of it be reused for your your higher margin, you know, branded spirits Offerings.

Absolutely. And and we do that all the time. In fact, and and it goes both ways. If there's, you know, if there's a branded spirits barrel that, you know, maybe the innovation team decided to go a different direction on, then those get freed up, likewise, for distilling solutions customers. So yeah, it's it's a very symbiotic relationship between the two segments as it relates to inventory.

Okay. And then So you know, as the distilling solutions business recovers which is the customer segment that's gonna drive that improvement? The the beginning of that improvement.

Yeah. And around yeah. I understand it's not for 2025. This is gonna be at, you know, on year As you, you know, you talked about it going into 2026, you know, still being being weak. But as as you look a little longer term, which is the segment it starts to drive your business Mhmm. More positive growth. Yeah. So, you know, the way the way we look at it and the way, you know, we're really trying to dial it in is focusing on certain customers, but also where we're differentiated. And where we're differentiated is in the higher rye mass bills that we provide. We're also differentiated in that a lot of these customers, we know, we've supplied for a long time. So we are almost synonymous if not fully synonymous with their taste profile. So easy and quick answer is that the large the larger national multinational customers of ours who've been around a long time are like likely, you know, gonna drive that growth in the future when it does return. Those same customers too have a lot of inventory and we're working with them as well to recalibrate. But also, you know, the the other answer is is that it really comes down to the strength of the brand. There are some craft and regional brands that are doing very well. And and, you know, we we feel like they've got a a really good shot at, you know, becoming more household brands over time. So it's not just gonna be one certain segment. You know, the Yep. The crafts and the smaller brands are under probably more pressure. For a lot of reasons than maybe some of their larger peers. But that's where we that's where we come in handy, Mitch, is you know, we're able to help them innovate. We're able to help them blend. We're able to help them come out with new products to stay fresh in the mind of consumers. With their age. And we're able to, you know, give them affordable you know, new distillate, in warehouse form over time to grow.

And then should Just one more question. So I mean, this this down cycle in the industry and and and particularly as it relates to your wholesale business, the distill, you know, the solar products segment, is this this is basically accelerating your business transformation to being a You know? Almost a pure play branded spirits business. Is that correct? Is that the right way you're going to sort of strategically handle this? I know, yes, long term that are gonna be with you for a while, but it looks like this could be the the you know, I mean I mean, the catalyst to really accelerate the transformation. Is that is that the right way to look at this?

Yeah. I I think mostly, Mitch. You know, this isn't how we thought we'd get here. If I'm being perfectly honest, this was a lot sharper and and, you know, impactful of a downturn in the cycle. That than we even we anticipated. But it is a reminder as to why our strategy is and has been what it has been over the last five to ten years. You were with us when we first announced that we were going to start building organically our own brand and spirits. Initiative and capability in house back in 2014. We switched from building it in house to acquiring in 2020 after we realized that, you know what? The brown goods business is a great business but it's very volatile. And we also realize that building a brand and spirits business organically, it's a, really hard, and d, it takes a long time, and and c, it costs a lot of money. So that's when we switch from build to buy. And I think we all know where that led. That led you a fantastic acquisition of LUXCO in 2021. Followed by another fantastic acquisition of Penelope in 2023. So, you know, the idea of being a a branded spirits business was just that. It was it was an aspiration, just you know, forty years ago. So the fact that fast forwarding to 2025, it's gonna be our largest segment by sales and gross profit and it's also gonna be, you know, our most stable business And then it's also gonna be the business that's gonna enable us to grow much much faster and bigger into the future. We're very proud of the progress we've made, and we're really proud of how we're positioned going forward.

Okay. Thank you. And just final question and you sort of touched it on touched on it in that answer is in terms of M and A, some of the smaller craft, I mean, there are some good craft brands out there. Are there any conversations increasing? Do you anticipate doing any acquisition or is this a hunker down year and we'll we'll look at we'll look at acquisitions next year?

Primarily our distilling solutions business. And and that's through greater focus and partnership. But that focus and partnership applies to our other businesses as well. Because we we we got we always feel there's improvements to be to be made. You know, but m and a is gonna remain, you know, part of our long-term strategy. So we're not we're not putting our head all the way down ever We we have to always in in my view anyway, Mitch, you know, keep, you know, keep our eyes open as opportunities come because sometimes the best opportunities come in tough times and we don't wanna we don't wanna turn our head to that. More specifically, well, you know, we ensured on the call, but our customer count last year, as we entered 2024, was more than eight hundred and forty customers. This year, even in the tougher, you know, 2024 environment, it grew to more than nine hundred and thirty customers. So within that customer set, you know, there there could be a lot of options. Mitch, to do some strategically. And, you know, I think what you also see in these environments is a lot of creative and innovative, you know, partnership ideas. So, you know, we we don't know where this where things could go, but I do know that as we our customers that that that's gonna be, you know, always gonna be a possibility just as it's been in the past.

Okay. Alright. Well, thank you for the insights. Appreciate it.

Thank you. Thank you, Mitch.

Thank you for your interest in our company.

Go ahead, John.

Yep.

This concludes our question and answer session. I'd like to turn the conference back over to Brandon Goll for any closing remarks.

Thank you for your interest in our company and for joining us today for our fourth quarter earnings call. We look forward to meeting with many of you over the next few weeks.